Consulting by RPM || Free Advice Blog

An Idea for Libertarian-ish Social Security Reform

How about this? The government says to current workers, “OK, we will pay you the present discounted value of what we owe you actuarially for Social Security at the current benefit scale, but we will throw on a 50% penalty. Do you want to take the deal?”

Presumably millions would.

Then the government says, “OK, instead of us now sending you a check–which of course would be paid for simply by raising the deficit–you can claim this as a tax credit. If the amount we owe is more than your current tax liability, you just roll it forward until we work off our debt to you.”

The above scheme doesn’t completely abolish Social Security, and it is vulnerable to the politicians just jacking up tax rates to compensate, but I like it because:

(1) It involves no new rights violations. What the government does is reduce the amount it plans on taking from future taxpayers (to pay current workers’ Social Security benefits down the road when they retire), and the way it finances it is to reduce taxes on current workers. Yes, there are still remaining rights violations after the above is implemented, but (if I’m thinking through it properly) the above represents an unambiguous reduction.

(2) The 50% (or whatever it is) penalty rate lets the politicians clean up the government’s liabilities very cheaply.

(3) The people opting in obviously benefit.

I am trying to think of a way to work in Laffer Curve effects, so that rather than give people a tax credit of a certain dollar amount, instead the government reduces their marginal tax rates. The problem with this approach is that you don’t know how much income someone would have generated in the absence of the policy change. But it would probably be even better if, instead of doing the tax credit, instead the government took your average AGI from the past 3 (or whatever) years, and then figured out how much it would reduce your marginal tax rates by. So if you had an average year, it works out to the same reduction in tax liability. But if you bust your butt because of the tax holiday, you end up “saving” more than what the government computed that it owed you in exchange for renouncing your future Social Security benefits.

By the way, it’s late and I just wanted to fire this off. I am not sure how to handle a worker who still has years of working ahead of him. I actually wasn’t thinking with the above, “And now this guy would be totally out of the system,” because then you have to deal with his stream of future Social Security contributions. I guess you keep those fixed, and then still ask the guy upfront, “Do you want a lump sum [after the penalty] to renounce your claim on future benefits, even though you still have to contribute?”